Home/ Money / Personal Finance/  Analysts overestimated corporate earnings in 8 out of last 10 years: Ambit

Analysts in the country overestimated corporate earnings in eight out of the last 10 financial years, Ambit Asset Management has said. In a media interaction on Wednesday, the company showcased research indicating that on average, analysts predicted optimistic earnings for each financial year two years ahead only to downgrade the estimates drastically when the concerned year dawned.

The overestimation was at its worst in FY16 and FY17, resulting in a negative divergence of 24% and 25%, respectively. However, two years, FY11 and FY19, also saw underestimation resulting in a positive divergence of 14% and 4%.

“There are two reasons for this. First, analysts have not been able to anticipate major negative events such as the European debt crisis, demonetization, GST rollout, IL&FS crisis and the covid-19 pandemic. Second, when markets run-up due to liquidity and valuations get stretched, analysts probably are over-optimistic to defend valuations," said Sushant Bhansali, chief executive officer of Ambit Asset Management.

Analysts are also afraid of sticking their neck out and moving away from the herd. Being from when you are an outlier is far worse than being wrong when you are part of the consensus, said a CEO of a portfolio management services (PMS) provider on condition of anonymity.

In the context of India, companies added capacity and took on debt at the start of this decade and the effects of that have caused corporate profits to lag even the GDP growth, said Vikas Gupta, CEO and chief investment strategist, OmniScience Capital. “Earnings estimates for FY21 and FY22 are particularly unreliable. You need to conduct a scenario analysis for future years and decide on the basis of that," he added.

Equity investors, including those in the equity mutual funds, are often influenced by forecasts of corporate earnings by analysts. However, they should factor in this consistent overestimation in their decisions.

A disciplined approach through systematic investment plans (SIPs) and systematic transfer plans (STPs) should prevail over the news or analyst call-based lumpsum investment.

Neil Borate
Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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Updated: 25 Jun 2020, 11:39 AM IST
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